Sampoerna Agro; Volumes jumped in 1Q11; Buy; Rp3,375; TP Rp4,200; SGRO IJ - DBS Vickers

At a Glance
· 1Q11 earnings (-8% q-o-q, quadrupled y-o-y) were significantly above our and consensus estimates
· 1Q11 FFB output jumped by 82% y-o-y – well ahead of peers’ growth of c.20%
· Net cash position rose by 6% from Dec10 to Rp564bn while total debts declined 21% to Rp288bn
· Buy call reiterated for 24% upside to Rp4,200 TP

Comment on Results
Sampoerna Agro (SGRO) booked stronger-than-expected1Q11 earnings of Rp186.5bn (-8% q-o-q, +336% y-o-y), making up 34% of our full year forecast. Own FFB output jumped by 82% y-o-y, while smallholders harvested 172% higher FFB tonnage y-o-y (both are from low base). Sequentially, they are 11% and 24% lower, respectively. CPO output doubled y-o-y to 82,664 MT, while sales volume jumped 87% to 72,131 MT – resulting in CPO inventory building up to 35k MT from 25k MT at end of Dec10. We understand that SGRO has since end of Mar11 reduced its CPO inventory, implying earnings momentum next quarter. Sequentially, FFB and CPO output were 11% and 19% lower q-o-q. SGRO reported 122% y-o-y higher but 27% q-o-q lower cost of sales, reflecting similar movements in smallholder FFB volumes processed. Cash conversion cycle was higher at 37 days from 20 days in 4Q10 on longer inventory days and shorter payable days.

1Q11 net margin expanded to 25% (vs.21% in 4Q10 and 14% in 1Q10), on +5% q-o-q, +28% y-o-y higher CPO ASP. The group is in a net cash position, with Rp564bn cash and Rp288bn total borrowings. In 1Q11, SGRO’s planted area reached c.104k ha, while new planting is expected to reach c.5k ha this year.

Recommendation
We maintain FY11 forecasts for now, as we expect 2Q11 and 3Q11 FFB output growth to decelerate y-o-y – implying a 9% y-o-y increase in CPO output. SGRO remains our pick for Indonesian upstream play, given increasing share of own production, aggressive planting, and strong balance sheet. Our current TP of Rp4,200 offers 24% upside, ex. 2.7% yield. Seasonally stronger earnings in subsequent quarters would be the catalyst for the stock.